We analyze exchange-rate management by the central bank when it makes the FX market for the sake of social-welfare objectives. It is assumed that markets are incomplete, so that agents are exposed to exchange-rate volatility against which they cannot fully hedge. It follows that the central bank may provide insurance by smoothing the exchange rate. However, smoothing the exchange rate also crea...

In an economy with a fixed exchange rate regime that suffers an adverse shock, we study the delay strategies of speculators that may trigger an endogenous devaluation before it occurs exogenously. The game played by the speculators has a unique symmetric Nash equilibrium which is a strongly rational expectation equilibrium. A higher uncertainty about the initial level of reserves of the Central...

This paper proposes a continuous-time framework that explains some stylised facts in recent “twin crises” episodes. I show that access to the world capital market enables the domestic economy to achieve a more efficient allocation of resources. However, the banking sector becomes more fragile when this international borrowing is wealth-constrained. A temporary shock is amplified and becomes per...

We model sudden stops in a small open economy as rare discrete events precipitated by increases the world risk-free rate. When external debt is large, exhibits multiple equilibria, one where and consumption remain high, with collapse consumption. Private agents delever following an increase interest rate, but they fail to internalize impact of deleveraging on price collateral. For high levels d...

Bernhard and Leblang (1999) argue that since adopting a pegged exchange rate in an era of mobile capital inhibits the use of monetary policy for electoral purposes, elements of domestic political institutions that influence the expected utility of controlling office ought to help determine the choice of exchange rate regime. Clark (2001) argues that since adopting a pegged exchange rate enhance...